Romania ready to disburse first tranche of €150mn loan to Moldova

By bne IntelliNews June 14, 2016

Romania’s government has initiated the technical procedures for the disbursement of the first €60mn tranche of its €150mn loan to Moldova, Romania’s Prime Minister Dacian Ciolos said on June 14 after meeting Moldovan parliament speaker Andrian Candu, according to a press release from the parliament in Chisinau.

The actual disbursement still depends on the country's relationship with the International Monetary Fund, Ciolos' press officer Anca Paduraru told Evenimentul Zilei daily. The first tranche will be disbursed upon Moldova's government signing the Staff Level Agreement with the IMF, most likely in July, Moldova's ambassador to Romania explained in an interview with Radio Free Europe.

The disbursement comes at the right moment to convince Moldovan lawmakers to endorse the government’s 2016 budget. The loan, signed between the two countries last October, was conditioned on democratic reforms in Moldova, which at the time was in a state of escalating political turmoil.

Moldova’s government expects two tranches of the loan from Romania, worth a total €110mn, to be disbursed this year. The funds are critical for the financing of the budget, besides the loans expected from the World Bank and the grant expected from the European Union.

“We wish Moldova will use the financial support not only in order to overcome its financial problems, but also in order to re-gain the trust of its Western partners,” Ciolos said. It is important that Moldova goes through the necessary reforms and the money is used for the initiation of the process, he explained.

Candu visited Romania in an attempt to unblock the loan, which is a key element of Moldova’s budget planning. Moldova’s government also expects a visit from International Monetary Fund (IMF) experts in early July, after the Fund eventually announced plans to initiate talks on a programme with the country.

During his visit to Romania, Candu actively used the political alliances of the Moldovan Democratic Party (PD) he represents. A significant number of Moldovan citizens hold dual citizenship and will vote in the Romanian parliamentary elections this autumn.

However, the the association between the PD’s main sponsor, controversial oligarch Vlad Plahotniuc, and the unpopular government in Moldova visibly limit any potential political gains for Romanian parties engaging in active support for the Moldovan authorities.

The head of Romania’s largest party, the Social Democratic Party (PSD), Liviu Dragnea still strongly recommended Ciolos to go ahead with the loan. PSD has maintained closed ties with Moldova’s PD, as both are members of the Socialist International.

Back at home, Moldova’s parliament endorsed the budget in two of three planned readings in early June. However, the opposition has seriously questioned the external financing that is a critical part of the bill. The deficit is envisaged to widen to 3.2% of GDP this year from 2.3% in 2016 and the country has no access to foreign financial markets.

The government projects gross MDL6.5bn (€290mn) foreign loans. It also expects the European Union to extend a MDL3.6bn grant, which includes two-year disbursements. Together, these two sources account for 7.5% of the year’s GDP and depend on the unblocking of external financing.

Domestically, the cost of borrowing is still in double-digits despite a significant decline during the past months. Furthermore, the government has to cover the 11% of GDP losses of three failed banks involved in the $1bn bank frauds, which will cost the country some 0.5% of GDP in the long term, though this will not start until next year.

Romania’s president Klaus Iohannis promulgated the government’s decision on the €150mn loan to Moldova in early May. He previously returned the bill to lawmakers at the end of last year, citingthe lack of reforms in Moldova. At that time, there was no ruling majority in Moldova and another political crisis was expected in March. In the meantime, the political situation has stabilised, but it is premature to conclude that significant reforms have been initiated.

In January, Ciolos issued a list of seven conditions to be met by Moldova before the disbursement of the first tranche of the loan, though the conditions are not included in the loan agreement.

Among the key actions expected from Moldova’s government are the transparent appointment of an independent governor of the central bank, strengthening the role of the central bank with a view to streamlining the banking sector, the initiation of procedures for an agreement with the International Monetary Fund and an updated draft of the action plan for judicial reforms.

Romania also recommended that Moldova’s government strengthen its dialogue with civic society organisations, in the letter which was published on the Romanian government website on January 30.

The current majority was formed around the PD, and has endorsed a new central bank governor. The Constitutional Court has ruled on direct presidential elections, averting a major constitutional crisis in March when the term of President Nicolae Timofti expired. Lawmakers have scheduled presidential elections for this autumn. The three troubled banks involved in the $1bn fraud were liquidated and the central bank is looking for ways, helped by consultancy firm Kroll, to recover the money. The government is issuing long-term bonds to  compensate the central bank for the emergency aid it extended to the banks in 2014-2015.

On the downside, the political majority is still controlled by Plahotniuc, who holds the official position of “political coordinator of the majority”. The 11% of GDP loses of the troubled banks will be paid by the government, unless the lost funds are recovered - an unlikely outcome.


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